EU approves green subsidies and 'capacity market'

By Edd Gent

Published Wednesday, July 23, 2014

A new system of renewable subsidies and a ‘capacity market’ to prevent blackouts have been given the green light by the EU.

The ‘contracts for difference’ scheme will pay a guaranteed price for electricity generated from projects such as offshore wind farms, with the cost added to consumer bills, with the aim of giving investors the certainty to back low-carbon generation.

The ‘capacity market’ gives generators, and operators of energy storage and demand reduction schemes the chance to bid in annual auctions for payments to ensure there is enough power available to meet peak demand as several older power stations go offline.

The European Commission today concluded that both schemes meet competition rules that regulate the provision of state aid.

Commission vice-president in charge of competition policy Joaquin Almunia said: "The UK contracts for difference encourage all renewable energy technologies producing electricity to compete against each other for support beyond 2016.

"It is a fine example of how to promote the decarbonisation of the economy with market-based support mechanisms, at the lowest possible cost for consumers."

Under the £15bn contracts for difference scheme, established renewable technologies such as onshore wind, solar farms and ‘green’ gas from landfill or sewage sites will compete against each other in auctions for financial support.

Newer and more innovative technologies such as offshore wind, tidal stream or geothermal energy will initially benefit from allocated budgets to promote their development but will also be subject to auctions.

The European Commission had decided to look into the capacity market plans after Norway complained last year that its exporters would be excluded from the system, but it has found the scheme will contribute to ensuring Britain's energy supply security without distorting competition.

Mr Almunia said: "The UK capacity market embraces the principles of technology neutrality and competitive bidding to ensure generation adequacy at the lowest possible cost for consumers, in line with EU state aid rules."

The commission also found that providing public support worth £9.7bn to five offshore wind farms, which were awarded contracts for difference early without competition to avoid delays in investment, were in line with the rules.

The European Commission has yet to rule on three biomass projects which were given early contracts alongside the offshore wind farms. The support given to the eight early movers raised concerns from the National Audit Office that it did not secure the best deal for consumers by awarding more than £16 billion in contracts without competition.

The UK is also waiting for the Commission to rule on whether the subsidies negotiated with French energy giant EDF for power generated by the planned new nuclear power plant at Hinkley Point, Somerset, are in line with the rules.

"This is great news, and shows that our major reforms to the electricity markets are urgent and needed to turn around the historic neglect of the sector," said Energy and Climate Change Secretary Ed Davey.

"We are the world leader in investment for low-carbon energy and energy security. The average annual investment in renewables has doubled since 2010 – with a record breaking £8bn worth in 2013.

"And we'll continue to lead in building a low-carbon electricity sector based on home-grown energy sources, reducing our reliance on polluting fuels and volatile energy markets at the lowest possible cost to consumers."

But environmental groups have criticised the Commission's approval as pollutant-heavy coal plants will also be eligible to apply for capacity payments. According to Brussels-based thinktank E3G, around 10GW of UK coal capacity could be in line for payments later this year and a further 5GW in the future.

"The capacity market risks pushing up bills and holding up progress towards a decarbonised power sector by throwing money at the UK's old, dirty coal plants," said Jenny Banks at WWF-UK.

"It's hard to believe that a country which has just reaffirmed its commitment to tackling climate change by choosing not to amend the fourth carbon budget is about to introduce a policy which could lock in vast payments to its oldest and dirtiest power stations until the 2030s.

"The capacity market is skewed in favour of large existing generators while side-lining valuable sources of flexible capacity such as interconnection, demand reduction and response and electricity storage.

"Allowing these technologies to compete on a level playing field could push down prices and help integrate renewables into the UK electricity mix."